The History of DeFi: How the Digital Bank Was Born
1. Why Couldn’t Bitcoin Become “Real Money”?
To understand the history of DeFi (Decentralized Finance), we need to go back to 2009, when Bitcoin first appeared.
People were fascinated by the idea that a currency could exist without any central authority. Bitcoin soon gained massive attention as the world’s first decentralized digital currency.
However, many began to question whether Bitcoin could truly function as money in daily life.
Money, after all, needs to be usable and practical in everyday transactions — buying coffee, paying rent, or transferring value seamlessly. Bitcoin, despite its innovation, struggled with this utility.
It was great as a store of value but not as a medium of exchange.
That gap paved the way for a new idea — and in July 2015, Ethereum emerged to change everything.
2. Ethereum and the Rise of the “Smart Contract”
Unlike Bitcoin, Ethereum introduced a revolutionary concept: the ability to program directly on the blockchain.
This feature was called a Smart Contract.
Smart contracts solved Bitcoin’s biggest limitation — the lack of real-world usability.
With Ethereum, developers could create decentralized applications (DApps) that automatically execute agreements without intermediaries.
A smart contract works like a digital vending machine:
Two parties, A and B, don’t need to trust each other or rely on a middleman. They simply agree on conditions written into code. Once those conditions are met, the transaction executes automatically — securely, transparently, and without delay.
This single innovation — the smart contract — sparked an explosion of projects built on Ethereum.
Among them was a new kind of finance that would redefine the crypto world: DeFi.
3. The First Step: How “DAI” Was Born
The earliest DeFi builders faced one major problem — volatility.
Cryptocurrency prices fluctuated wildly, making it hard to use them for stable financial activities.
In December 2017, the Maker Foundation launched a protocol called MakerDAO.
Its founders dreamed of creating an “Internet Dollar” — a stable currency built on Ethereum but backed by digital collateral, not traditional bank reserves.
Here’s how it worked:
Users could deposit ETH into MakerDAO’s smart contract and mint a new stablecoin called DAI, pegged 1:1 to the U.S. dollar.
If you locked up $150 worth of ETH, you could borrow $100 worth of DAI — ensuring the system stayed over-collateralized.
This was the birth of the “money market” on Ethereum — a foundation that allowed DeFi to evolve into a full-scale financial system.
People could borrow, lend, and trade using DAI, all without touching a bank.
4. The First Digital Bank: How Compound Started Lending
While MakerDAO created DAI, there weren’t many places to use it yet.
Then, in 2018, a new project appeared — Compound, a decentralized lending protocol.
Founded in San Francisco in 2017, Compound aimed to build a decentralized interest-bearing system using digital assets.
Backed by major investors like Coinbase, Andreessen Horowitz (a16z), and Bain Capital, the team believed that replicating traditional banking on-chain could transform how people access finance.
Here’s how Compound worked:
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Lenders (suppliers) could deposit their crypto assets into the protocol.
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Borrowers could take loans by providing collateral.
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Interest payments flowed automatically between them via smart contracts, with Compound taking a small fee.
Depositors received special tokens like cDAI, representing their claim on the pool — similar to a digital deposit receipt.
Compound became the first DeFi protocol to truly replicate banking functions such as savings and loans in a decentralized environment.
5. The Trading Revolution: How Uniswap Changed Everything
By 2018, the DeFi infrastructure was growing, but a major problem remained — token trading.
Most trading still happened on centralized exchanges, which relied on order books matching buyers and sellers.
Running an on-chain order book was expensive and inefficient due to high gas fees.
Liquidity providers couldn’t profitably maintain constant orders on Ethereum.
That’s when Vitalik Buterin proposed a groundbreaking idea:
“What if we used a pool instead of an order book?”
Inspired by this, Uniswap was born.
Uniswap introduced the Automated Market Maker (AMM) model, where users deposit tokens into a liquidity pool, and trades are executed automatically using a simple price formula.
This eliminated the need for centralized exchanges and allowed anyone to list and trade tokens freely.
For the first time, new projects could launch tokens instantly without waiting for exchange approval.
This democratized access to liquidity and fueled the next wave of crypto innovation.
6. The Flash Loan Revolution: Aave’s Ghostly Innovation
After Uniswap reshaped token trading, a Finnish project named Aave (meaning “ghost” in Finnish) took DeFi even further.
Originally launched in 2017 as “ETHLend,” Aave officially debuted in January 2020 with a bold innovation — the Flash Loan.
Flash loans allowed users to borrow large sums instantly without collateral, provided the entire transaction — borrowing, trading, and repayment — happened within a single blockchain block.
In simple terms:
A user could execute a series of transactions — like borrowing DAI, swapping it for USDC, using it elsewhere, and repaying the loan — all in one go.
If any step failed, the entire transaction would revert automatically.
Although this required advanced coding skills, flash loans introduced a completely new financial primitive — instant, trustless arbitrage — and became a defining innovation in DeFi history.
7. DeFi Today: The Rise of Digital Finance
Looking back, DeFi’s story shows how blockchain evolved from static value storage to a living financial ecosystem.
It all began with:
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MakerDAO – Issued the first crypto-collateralized stablecoin, DAI.
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Compound – Created a decentralized savings and lending market.
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Uniswap – Enabled token swaps without intermediaries.
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Aave – Introduced flash loans and advanced liquidity systems.
These innovations gave cryptocurrencies real utility, not just speculative value.
Even during the 2022 bear market, DeFi protocols continued to thrive:
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MakerDAO’s DAI supply exceeded $4 billion (₩6 trillion).
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Aave processed billions in flash loans.
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Uniswap maintained over $4 billion in total liquidity.
DeFi is no longer an experiment — it’s the foundation of the digital banking era, a financial system open to anyone, anywhere, without permission.
In Summary
From Bitcoin’s dream of digital money to Ethereum’s programmable finance,
DeFi represents the most ambitious attempt to rebuild the world’s financial system — open, transparent, and borderless.
The first banks were built with bricks.
The next ones are being built with code.